Tax season is here again. This year, American taxpayers must file by Monday, April 18. And while filing taxes isn’t exactly most peoples’ idea of “fun,” there’s one thing that can make it all feel worth it: the potential of receiving a tax refund.
Of course, deciding how you’ll spend the money is a personal decision. But sometimes, it can feel overwhelming when you have so many options. Should you spend it? Save it? Invest it? Or something else?
Whether your refund is big or small, here are a few ideas for how to use your tax refund this year.
1. Jump Start Your Emergency Fund
An emergency fund -- or a “peace of mind” account, as we like to call them -- are an essential part of a healthy financial life. But unfortunately, many Americans don’t currently have emergency funds. According to a Bankrate survey
in January 2022, more than half of Americans (56%) wouldn’t be able to cover a $1,000 emergency expense.
On a positive note, the 44% of Americans who could cover a $1,000 emergency expense is the highest it’s been in eight years. But the goal is that everyone has a safety net for when the unexpected happens.
If you don’t have an emergency fund yet, it’s never too late to start one. Using your tax refund could be the perfect way to start growing your nest egg. Even if you aren’t able to use all of your refund for this purpose, starting small is better than not starting at all. Then, consider contributing a certain amount to your fund each month. You’ll gain motivation, confidence, and peace of mind as you see that emergency fund grow.
2. Save for the Future
Putting money into your emergency fund isn’t the only way you can save for the future with your tax refund. Consider making additional contributions to your retirement account if you’re able.
Maybe that means you direct a bit more of your paycheck into your 401(k) or employer-sponsored retirement plan knowing that you’ve got a bit of extra income. Or, take your refund and deposit it directly into your individual retirement account (IRA). Remember that you can contribute up to $6,000 into your IRA each year, or $7,000 if you’re age 55 or older. Your tax return could help ensure you’re maximizing your contribution limits.
Another way you can invest in your future is by directing your tax refund into an education savings account for your child or children. If you haven’t already, you can set up a 529 plan that can help your children pay for higher education and associated expenses. And remember, if your first child doesn’t use all the money in the account, it can be transferred to another child.
3. Pay Off Some Debt
If you have debt, you’re not alone. According to CNBC
, the average American has $90,460 in debt. Whether it’s credit card debt, auto loans, student loans, mortgage loans, personal loans, or something else, debt can feel like a heavy weight as you work toward building a financially healthy future.
Using your tax refund to help pay off some of your debt may feel like a small step, but it can help you get on the right track. There are a couple of different debt repayment strategies, so think about which one makes more sense for you: the snowball method and the avalanche method.
With the snowball method, you pay off your smaller debts first to help build confidence and motivation in the debt repayment process. With the avalanche method, you pay debts with the highest interest rate first. Either way, your tax return can help you make a dent in your debt.
4. Have Some Fun
After a couple of financially and personally stressful years, there’s no shame in spending your tax return on yourself and your family. Some of the things we enjoyed most in life were put on hold, so if there’s a way you can spend your tax return to make life more enjoyable, it’s definitely worth considering.
Maybe that’s a vacation to the beach or to see family or friends you haven’t seen in years. Or maybe, you’re feeling ready to sign up for a cooking class, painting class, or dance class. Using your tax refund in this way can do wonders for your mental and emotional wellbeing.
5. Make a Deposit to Open a Credit Builder Credit Card
can be a tricky subject. If your credit score isn’t high enough, you may have a hard time getting approved for a mortgage or auto loan. But it’s not all about finances -- you may be asked for your credit score in other situations such as putting in an apartment rental application, applying for car or home insurance, or even applying for a new job.
If you’re looking to build or establish credit
, consider using your tax refund as the deposit needed for a new secured credit card. Because secured credit cards are backed by a cash deposit, they can then be used if you default on your payment. And this means it’s less risky for you. With a secured credit card, making your everyday purchases and paying in full by the due date can help boost your score.
Whether your tax refund was $300 or $3,000, you set your own credit limit anywhere in between -- it just depends on what you choose to deposit. And you can always increase your credit limit later by adding funds in increments of $50 or more to the savings account.
Achieving Your Financial Goals Together
No matter what your financial goals are, Academy Bank is working hard to help you achieve them. If you’re looking for a partner in your personal finance journey, we provide convenient options for savings accounts, checking accounts, and more.